Software stocks just delivered their second-best monthly performance since 2002, while chip stocks barely managed to finish August in positive territory despite a near-10% surge in the middle of the month.

The iShares Expanded Tech-Software ETF (IGV) soared more than 16% in August, whereas the iShares Semiconductor ETF (SOXX) ended the month with a modest 1% gain. The S&P 500 rose just over 2.5% during the same period.

Early in the month, chip stocks were keeping pace, but over the final two weeks of August, SOXX gave back most of its gains while software stocks continued their relentless climb higher, according to Yahoo Finance AlphaSpace data.

Chips weren't the only segment under pressure. Sectors responsible for the physical hardware supply in the AI boom—electrical equipment, power infrastructure, networking hardware, and construction—rallied broadly before mid-August, then peaked and pulled back collectively, while software stocks kept pushing upward.

This further widened the divergence that had already emerged earlier in August. Standout software performers were remarkable: Atlassian (TEAM) nearly doubled in August, posting its best month ever; Palantir (PLTR) gained over 50%; Salesforce (CRM) surged more than 40%, recording its strongest month since 2005; ServiceNow (NOW) advanced over 30%; and CrowdStrike (CRWD) climbed more than 20%.

The chip sector, however, reversed course in the second half of the month. Since August 17, 58 of the 61 semiconductor stocks in Yahoo Finance's tracking basket declined, erasing approximately $1.1 trillion in combined market value.

The market now enters September in two very different states: software stocks carry strong momentum, while a host of AI hardware-related trades have shifted into defensive mode. This was no ordinary software rally—the S&P Broad Software Index rose about 14% in August, the strongest August on record since tracking began in 1990.

Yahoo Finance examined historical data, identifying 12 prior instances of strong August software rallies and reviewing how markets performed afterward. Historical patterns show software stocks held up reasonably well through September 15, with a median gain of about 1%, while semiconductor stocks saw a median decline of roughly 1% by that date. The environment deteriorated noticeably after September 15: from mid-month to month-end, software stocks posted a median pullback of approximately -1%, the S&P 500 fell about -2%, and semiconductor stocks dropped a median of roughly -3.5%.

With only 12 historical samples, these results reflect historical tendencies rather than predictive forecasts. Seasonal factors also paint an unfavorable backdrop—September has historically been the weakest month for the S&P 500, and the market now enters its most volatile stretch of the year. August demonstrated that the market can rotate into software leadership even as chips weaken; September will test just how long this rally can persist.